It is important to grow the top line of your business on an annual basis, but you also need to make sure the bottom line is healthy which can help fund that growth.
This is particularly important if you are a manufacturing company and need to be efficient in your production process. In most cases, the two biggest expenses in your manufacturing business are labor and raw materials. There are exceptions, of course, in machine intensive automated manufacturing plants, but let’s focus on the former. So how can we make sure the production line is running at peak performance? One very effective way is to put the right balance of production KPIs in place. Some of these are leading indicator KPIs that help provide insight into future performance and some are results KPIs that tell you how you have done. It is good to have both, although I always prefer giving my production managers a good set of leading indicator KPIs as these manufacturing metrics drive the results.
Here are some of the most effective manufacturing KPIs and metrics:
Production KPI Examples
- Capacity Utilization – This measures how much of your available capacity you are actually using on your production line. The higher the better. Buildings and equipment are expensive assets and you want to maximize their use. It also helps to manage what you sell by production center so you do not over or undersell a particular manufacturing line, thereby balancing the workload.
- On Standard Operating Efficiency – If you have a piece rate or incentive system in place, you want to measure how employees are performing against the labor standards you used to cost the product. If these numbers are low, it is beneficial to examine methods and do post-production analysis. It is very common for companies to underestimate labor costs, and this KPI can help you identify this.
- Overall Operating Efficiency (OOE)– This is one of my favorites because it includes on standard time as well as
offstandard time. You are trying to maximize this percentage so that employees are adding value the majority of the time they are clocked in and present.
- Overall Equipment Effectiveness OEE– This metric measures the overall effectiveness of a piece of production equipment or the entire line. Availability x Performance x Quality. This is a great KPI to maximize to ensure you are running the plant effectively.
- Machine Downtime – This KPI and the two below are components of OEE above, but worth measuring on their own. This includes scheduled downtime for maintenance, setups and unscheduled downtime and can include machine changeover.
- Unscheduled Down Time – This one can be a killer and one to minimize because it affects other processes in the production chain. Scheduled and predictive maintenance can help minimize unscheduled downtime. There are wireless sensors you can use which can help support predictive maintenance to reduce unscheduled downtime.
- Machine Set Up Time - A lot of production time can be lost to set up and changeovers. Implementing SMED (single minute exchange of dies or similar techniques) can really help keep this lost time to a minimum. Look for ways to incorporate parts of the set up so that they are internal to the process to avoid taking machines offline for any longer than you need to. Quick changeover setups also reduce this time.
- Inventory Turns – In today’s Lean environment and pull approach, keeping inventories to a minimum can really help free up cash and give you the ability to respond to changing customer needs much more efficiently and with better delivery times. It also keeps your on-hand inventory fresh and relevant to avoid obsolescence and
- Inventory Accuracy – There is nothing worse than putting a work order into production only to find your raw goods inventory was inaccurate. This either delays the start of production or causes delays in the line if the order happened to make it into
process. I had a rule to never let an order begin production unless everything was available in-house for the order. This helps you manage and maintain your supply chain to keep the right amount of inventory on hand to keep things running.
- Quality – This is a no-brainer and table stakes today, but still necessary to measure. There are many ways to measure quality, and I am listing a few below for consideration. Percent defective is one of many ways you can measure quality. Establishing clear and consistent standards goes a long way to reaching your quality goals. The only way to continuously improve is to learn from your mistakes, so don't just measure the quality - determine the root cause and fix it.
- First Pass Yield – The percentage of products manufactured correctly and to spec the first time through the process. Getting this number up reduces the next two listed.
- Rework – There is no bigger waste of time and raw materials than rework. Implementing quality at the source and effectively training people can go a long way to minimizing this waste.
- Scrap – Raw material costs are expensive so minimizing scrap is important. The more robust your processes and training programs are, the less scrap you are likely to produce. When you do produce scrap, do your best to recycle it if possible.
- Failed Audits – There is nothing worse than having a shipment ready to go out the door that fails a final quality control audit. Better here than on the customer's doorstep, but this still leads to rework, scrap and delays. The goal for this KPI should be 0 failed audits, and if it’s not, a root cause analysis is in order.
- On-Time Delivery – This is a KPI that really keeps customers happy but is also motivating to your production employees. Set the goal for 100% on-time weekly and consider rewarding your employees if they achieve it. Many of the other leading indicators mentioned help drive this one. What percentage of total products are delivered on time? Read this blog article to learn about KPIs, Culture, and Habits to Improve On-Time Delivery.
- Customer Returns – There is nothing worse than getting a defective product back from customers. Not only is it embarrassing, it ruins customer confidence. Even though this is a result indicator, it can help you determine problems in the production chain when you evaluate returned products. A good goal is to strive for zero returns.
- Training Hours – This is a great leading indicator that can drive a lot of the other KPIs on this list. Training doesn’t solve every problem, but there is no substitute for a good training and onboarding program. Too many companies still use the sink or swim method which creates a lot of problems.
- Employee Turnover – Happy employees make happy customers. If your turnover is high, it is time to do some root cause analysis to determine why. Quality and efficiency problems often stem from high turnover due to training new inexperienced employees.
- Reportable Health & Safety Incidents – Here's another KPI to strive for zero on. Many companies have embedded this in their culture. I grew up in a big railroad town, and I remember driving past the billboard of a locomotive where they would list how many days achieved with zero accidents. Very motivating for employees and something they were proud of. Accidents drive up workers' compensation rates and are hard on employee morale.
- Revenue per Employee – This is a basic indicator but can be a quick helpful way to see how the operation is doing overall; improving, standing still or becoming less efficient. It is also a good metric to use to compare your company against others in a similar industry.
- Profit per Employee – I like this KPI even more than the one above. Even though it’s lagging, it takes into consideration how well you are doing on many of the leading indicators above. Revenue per employee may look good, but you may see you have opportunities to improve profitability.
I know that many of you are also using OKRs, which are similar to KPIs. To learn more about the difference you might be interested in reading OKRs vs KPIs: What’s the Difference? to make sure that you have the right metrics to help you improve your production performance.
Bonus Production KPI: Cycle Time - The total time from the beginning to the end of your process, as defined by you and your customer. This is the amount of time it takes from the manufacturing process until the end of the process, sometimes defined as the delivery date to the end customer. Your KPI evaluation is important to understand the metrics that matter to your business.
I could continue on, but hopefully this list sparks some ideas for which KPIs you should be measuring on the KPI production floor. You have to run a tight ship if you want to be a world-class manufacturer, and measuring and monitoring the right KPIs can help you get there. Feel free to check out our 25 KPI Examples For Manufacturing Companies and 33 KPI Examples to Measure Productivity & Prevent Organizational Drag blog posts to fill out your manufacturing KPI dashboard. Or you can visit our comprehensive list of balanced scorecard KPIs. You can use this as your production metrics template that allows you to build your real time production KPI dashboard.
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Photo Credit: iStock by Getty Images
Photo Credit: iStock by Getty Images